By Justin Scheck
LONDON--In the coming days, the world's biggest publicly traded
oil companies will report fourth-quarter earnings, offering the
best look yet at the bite lower crude prices have taken out of Big
Oil.
For BP PLC, lower oil prices are just one headwind. A federal
trial now under way in New Orleans could levy penalties of as much
as $13.7 billion for the 2010 Deepwater Horizon oil spill in the
Gulf of Mexico. Meanwhile, BP owns nearly 20% of Russian producer
OAO Rosneft. Kremlin-controlled Rosneft faces Western sanctions on
exporting certain oil-development technology to Russia. It is also
struggling with the falling ruble and weaker oil prices.
BP, which has sold more than $40 billion in assets to pay
cleanup and legal costs from the Gulf spill, is also trying to rein
in costs that are higher than those of some competitors.
Royal Dutch Shell PLC kicks off earnings on Thursday--the first
among the four biggest nonstate-owned oil companies, or "super
majors," to report. While analysts expect a hit from lower oil
prices, they predict Shell's quarterly results will look good in
comparison to the year-earlier quarter. Before announcing earnings
in January of 2014, Shell issued its first profit warning in a
decade as issues including high costs and poor refinery margins ate
into earnings.
Chevron Corp. reports on Friday, with Exxon Mobil Corp., the
world's biggest oil company by market value, reporting on Monday.
BP follows on Tuesday.
Few analysts are predicting financial Armageddon at BP or at its
big competitors. The huge, integrated oil companies are cushioned
somewhat from the steep fall in prices by their refining and other
processing businesses, which often benefit from a decline in crude
since it lowers their cost of raw materials. The companies are
loaded with cash and have taken on relatively little debt after
years of high oil prices. And even at today's lower prices, many of
the fields they have developed remain profitable.
Still, among the super majors, BP may be especially vulnerable,
say investors and analysts. BP could face penalties far higher than
the $3.5 billion it set aside for the Gulf case, potentially
forcing it to dip further into its cash reserves. In July, BP
reaped nearly $700 million in dividends from its first full year as
a Rosneft shareholder. Analysts expect those payments to be much
smaller now.
"BP has a very sound, long-term resource base," said Jason
Kenney, an analyst with Santander. "But it's got some quite
significant near-term earnings and cash pressures relative to its
peer group." In addition to Russia and the prospective U.S.
penalties, the company has a higher cost basis than competitors, he
said.
Mr. Kenney calculates that BP's technical cost per barrel--which
includes spending on production and exploration along with
depreciation--is $32.93, compared to $30.69 for Shell, $30.13 for
Chevron and $23.20 for Exxon. That is due in part to BP's rapid
divestments outpacing cuts to spending.
BP said last month that while its production at the end of 2013
was about 25% lower than before the Gulf spill, its head count was
slightly higher. Now, the company is cutting those costs. It
recently announced layoffs in Scotland, and this week said it was
freezing salaries across the company.
BP's recent high costs also stem from a series of investments it
has made in big projects. Seven of those came online last year--a
development that would normally be positive, except it happened
just before oil prices slumped. The profit margins look far less
attractive than when they were planned.
For example, BP executives including Neil Shaw, chief operating
officer for the company's upstream projects, have called Angola and
the North Sea "high-margin areas." But BP's Clov project in Angola,
which recently came online, needs oil prices of about $60 per
barrel--about 20% higher than current prices--over its lifetime to
break even, Citigroup analysts estimate.
A BP North Sea project that recently began producing, called
Kinnoull, has a break-even price of closer to $70 per barrel, Citi
estimates. A BP spokesman says such projects are planned to produce
for decades, and aren't approved based on one-year oil-price
fluctuations.
BP, a staple of British pension fund portfolios, must also
maintain its dividend. The company has said in recent months that
it intends to maintain "progressive" dividends. That is important,
says Ivor Pether, a fund manager at Royal London Asset Management,
which has BP shares. "In a sense, that is the main thing they do"
as far as investors are concerned, he said.
Write to Justin Scheck at justin.scheck@wsj.com
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